06 Oct COTW: The Rule of 72
- The “Rule of 72” is a simple formula used in finance to estimate how long it will take to double an investment’s value by dividing 72 by the annual interest rate or annual growth rate.
- Over the past four decades, declining cash yields, proxied by the 3-month Treasury yield, have extended the doubling time for cash investments — particularly during the 7-year period of zero interest rates following the Global Financial Crisis (GFC) and the recent return to zero rates in 2020. As a result, yield seeking investors have been forced to take on increased levels of risk.
- With the Fed embarking on one of the fastest rate-hiking cycles in history, cash investors have found some relief. The 3-month Treasury yield has surged from 0.05% in December 2021 to over 5.4%, marking the highest rate in two decades. This dramatic shift means that investors can now double their investments in just 13.2 years, compared to the 1,440 years it would have taken had rates remained at 0.05%.
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